Oct. 15, 2013
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John Shinal, technology columnist for USA TODAY. / USA TODAY

by John Shinal, Special for USA TODAY

by John Shinal, Special for USA TODAY

SAN FRANCISCO - When Yahoo CEO Marissa Mayer hosts the company's quarterly conference call Tuesday, the big question from Wall Street analysts will likely be the same one it's been since she took the reins 15 months ago.

That is: When is the company going to start growing again?

While Mayer has righted the Yahoo ship - spurring a major recovery in its stock valuation - she still hasn't found a way to generate revenue growth.

On the eve of Yahoo's financial report, analysts expect the company to post flat sales during 2013, her first full year at the helm.

Growth expectations for next year are little better. The company is seen generating revenue of $4.6 billion in 2014, little changed from $4.5 billion in 2012.

The company's top line has stagnated even though Yahoo's primary market of online advertising is growing at a healthy clip.

Internet ad sales rose 15% in 2012,18% in the first half of this year, according to trade group Interactive Advertising Bureau.

The primary reason Mayer and Yahoo have been unable to capture any of that growth is that Google - Mayer's former employer - stands in the way.

Google's revenue is expected to soar 40% this year, to $60 billion, as it captures an ever greater share of the market for search advertising and display ads.

In that narrow sense, Mayer's challenge is no different than that faced by her numerous predecessors.

Mayer is Yahoo's sixth CEO since Terry Semel left the job in June 2007.

Yet, she also faces two new rivals in the online ad market. One of them, Facebook, is already twice the size of Yahoo, as measured by revenue, and growing fast. Analysts expect Facebook sales to rise 45% this year, to $7.4 billion.

The other new competitor, Twitter, saw its sales more than double in the first half of 2013, and is about to raise more than $1 billion in an IPO. With that war chest, the social-media site will be able to spend more heavily on marketing and in hiring the same prospective workers for which Yahoo, Facebook and Google compete.

Having competitors besides Google will make Mayer's task of reigniting revenue growth an even tougher one.

Mayer does have one ace in the hole, though, left to her by Semel.

In 2005, Yahoo invested $1 billion in the Chinese e-commerce company Alibaba, in exchange for a 40% stake.

Alibaba, which, unlike Yahoo, is growing rapidly, is now the largest online retailer in China, and could be worth as much as $80 billion.

Yahoo has reduced its stake in the company under a September 2012 agreement that called for it to divest half of its stake right away, then sell another 14% during any Alibaba public stock offering.

Thanks to the gains on its Alibaba stock sales, Yahoo reported a 41% rise in net income during the first half of this year, even while sales fell slightly.

Yahoo now has a roughly 24% stake in Alibaba, and the value of that asset has attracted investors who otherwise would have turned up their noses at buying shares of the company.

We won't know exactly what Alibaba is worth until it executes a successful IPO.

(There are expectations that Alibaba plans to conduct its IPO next year, most likely in New York, after its executives ended discussions with regulators from the Hong Kong Stock Exchange over a possible listing there.)

Yet, if Alibaba's investment bankers can get an $80 billion IPO valuation for the company sometime next year, that would make Yahoo's total stake worth at least $19 billion.

That's $17.27 a share, based on Yahoo's share count as of June 30, or about half the company's Friday closing price of $34.15.

Mayer can use that windfall to fund more investment and further share repurchases that can help boost Yahoo's per-share earnings - and its stock price.

Yahoo reduced its share count by 123 million, or 10%, during the 12 months ended in June, for example.

All this will give Mayer time to implement her strategy, much of which is based on updating and optimizing for mobile users the Yahoo websites and software applications that drive most of its Internet traffic - including sports, finance, entertainment and e-mail.

That's widely viewed as the right course, given that the mobile advertising business is growing about 10 times faster than the online ad market overall.

Yet, nothing that Mayer has said or done so far this year has convinced anyone on Wall Street that Yahoo can grow revenue this year or next.

While the financial benefits of Yahoo's Alibaba stake will last for some time, they won't last forever.

Sometime between now and then, if she wants to keep Yahoo attractive to growth investors, Mayer will need to prove she can get the company's operations growing again.

Yahoo is expected to report earnings per share of 33 cents for the third quarter, on revenue of $1.08 billion, based on the average estimate of Wall Street analysts.

John Shinal has covered tech and financial markets for 15 years at Bloomberg, BusinessWeek, the San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.